In two judgments that may be of significant interest to lenders, the Supreme Court of Canada has held that an unperfected security interest may take priority over a security interest taken subsequently under federal banking legislation.
The law as it currently stands may expose banks to considerable commercial risk. Banks may find that their Bank Act security interests are subject to undisclosed and unregistered PPSA or other security interests whose existence they had no way of discovering. While the Supreme Court of Canada acknowledged this concern, it concluded that any changes in priorities must come from legislative reform. Banks would be well advised to always take PPSA security in addition to Bank Act security where available.
Issued on November 5, 2010, the two rulings are Bank of Montreal v. Innovation Credit Union, 2010 SCC 47 and Royal Bank of Canada v. Radius Credit Union Ltd., 2010 SCC 48.
The decisions each involved a priority dispute between a credit union’s prior unregistered security interest taken under the PPSA and a bank’s subsequent security interest taken and registered under section 427 of the federal Bank Act.
The SCC held that the central point for resolving a priority dispute between the Bank Act security and the security taken under a provincial statute is found in the Bank Act itself. Pursuant to sections 427(2), 428, and 435(2) of the Bank Act, the bank can acquire no greater interest in the asset in question than the debtor himself had at the time of execution and delivery of the security interest.
When analyzing the nature of the interest granted to the bank, the SCC found that it was necessary to determine whether the credit union had acquired any interest under its prior unperfected security agreement that derogated from the debtor’s title to the collateral.
The Court found that the proper interpretation of ss. 427(2) and 435(2) of the Bank Act lead to the application of provincial property law to determine the effect of a prior security interest. Thus, the first-in-time PPSA security interest had priority over the Bank Act security because the banks could not acquire an interest greater than the debtor himself at the time the Bank Act security was taken. The Bank’s security interest was therefore subject to the credit union’s prior interest regardless of the fact that the credit union’s interest was unperfected.
- The Supreme Court has ruled that a prior unperfected PPSA or other security interest may take priority over a subsequently taken s. 427 Bank Act security.
- Banks are cautioned to register any interest under the Bank Act and PPSA, if possible, to reduce risk of exposure.